Oil Growth Driving CAD Higher, Brexit Hits Pound; Time To Sell GBP/CAD

The pound sterling keeps its status as a market outsider, which can become a good profit making opportunity taking into account current fundamentals. Without a doubt, Brexit uncertainty is to blame in the sterling’s selloff, but it’s not the only reason. Market participants are closely watching statistical data published by the U.K. government, and it leaves much to be desired too. According to the Office for National Statistics the U.K. economy significantly slowed down in the fourth quarter with GDP quarter-on-quarter growth contracting to 0.2% from 0.6% – its lowest in six years. For 2018 as a whole, GDP growth slipped to its lowest since 2012, at 1.4%, down from 1.8% in 2017.

The lack of progress on a Brexit deal and growing concerns that Britain will crash out of the European Union without any trade agreement on March 29 is disappointing both for consumers and businesses. The Bank of England has cut its economic growth forecast by 0.5% to 1.2% this year. If however the U.K. is forced to leave the EU on “hard” terms, economic growth will fall below 1%. Growth figures this weak were last seen over a decade ago.

As for the terms of the U.K.’s withdrawal from the EU, everything goes down to the no-deal scenario. Hard Brexit is almost inevitable given Parliament refuses to support Theresa May and her autonomy plan. The Northern Irish backstop seems to be the main obstacle. The House of Commons insists that this status of Ireland should be temporary, which does not suit the EU. The unwillingness of the parties to reach a consensus reduces the chances of Britain staying in the EU customs union and remaining part of the single European market.

Taking advantage of panic over Brexit, shorting GBP/CAD can be profitable in the present situation. And not only that. A stronger Canadian dollar driven up by higher oil prices is another reason to sell the GBP/CAD. Market hopes are that the U.S. and China will finally reach an agreement and settle their trade disputes which keep dragging down global economic growth. Statistics from OPEC encourages oil buyers too.

According to a monthly report, released on Thursday, the cartel’s oil output fell almost 800 000 barrels per day in January to 30.81 million barrels per day. The reduction came mostly from Saudi Arabia, the world’s top oil exporter, and was followed by the United Arab Emirates and Kuwait. OPEC confirms that the scale-back was in line with an agreement with non-OPEC members in December to cut production by 1.2 million barrels a day for the first half of 2019 to fight a glut in supplies and support weakening global demand.

With that being said, CAD will most likely continue its bullish rally. Add the GBP/CAD decline to the equation and we’ll see hidden profit making opportunities, particularly as we expect sterling to decline down to 1.67 mark as soon as by the end of the first half of 2019.

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